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The Independent Online
THE POUND may rise this week as reports indicate that the UK economy is bouncing back while inflation is subdued.

"We're buyers of the Goldilocks scenario coming through in the UK," said Murray Gunn, of Standard Life Investments. "You've got strong growth and low inflation. I don't see any signs that rates in the UK are going to be raised this year. We're relatively positive on sterling."

The pound, which was trading at $1.6163 on Friday, fell 0.33 per cent against the dollar last week. It could rise to $1.70 in the coming months, said Mr Gunn. The pound fell more than 1 per cent against the euro last week, leaving the euro at 0.6668 pound per euro on Friday.

Traders are looking forward to UK reports which are expected to confirm that the economy is recovering. Signs of growth reinforce expectations that the Bank of England, which last week left its benchmark rate unchanged, won't lower rates again.

Steady rates, in turn, mean the money market return on sterling deposits won't fall and that investors searching for yield are likely to remain enamoured of the pound. Currently, three-month sterling deposits offer investors six basis points less than three-month dollar deposits.

A jobs report coming out on Wednesday is likely to show that the number of Britons out of work and claiming benefits fell by 5,000 in July, helping keep the unemployment rate at a 19-year low.

The British Retail Consortium reports on July retail sales on Tuesday. Last month the BRC said retail sales rose 1.8 per cent in June from the previous month, after two months of decline.

The pound could get added support from any indications that the economy is growing fast enough to prompt the central bank to raise interest rates before long.

"The market expects that the Bank of England's next move will be to raise interest rates in the coming months," said Patrick Laub, chief currency trader at Landesbank Girozentrale Hessen-Thueringen in Frankfurt. "We can go lower in euro-sterling."

Higher interest rates would increase the return on sterling deposits. The Bank of England has lowered the bellwether interest rate seven times since October in a bid to prevent recession and encourage the borrowing that generates economic expansion.

In one sign that traders expect the central bank to reverse some of those rate cuts before the end of the year, three-month interest rate futures contracts expiring in December yield 56 basis points more than current three-month lending.

Yet, even as the economy rebounds, inflation threats are few, reducing the need for rate rises. Inflation erodes bonds' fixed value, so as long as it stays moribund, UK bonds could be supported.

Figures due on Monday are expected to show producers raised prices only 0.1 per cent in July, after holding prices steady for a second straight month in June.

"We're seeing strong growth data but the inflationary signs are becoming more muted," a fund manager said. "Our call is [for a] stable rate to year end."

Jobs numbers slated for release on Wednesday are expected to show wage cost growth and average earnings growth slowed in the three months through June.